Jana, Houston Exploration Trade Jabs After Meeting

NEW YORK (HedgeWorld.com)--Jana Partners LLC declared a victory for its own campaign to persuade shareholders to withhold their votes from the board of directors of the Houston Exploration Co., while the company itself appeared unmoved.

A dispute has arisen because on April 7, 2005, the Houston-based company, an independent natural gas and crude oil producer, announced the sale of Gulf of Mexico offshore assets for $590 million in cash. Since then, Jana has taken the position that the best use of that cash is the creation of a repurchase program.

Houston does have a stock repurchase plan in the works, but it involves the expenditure of $200 million, which Jana considers inadequate.

According to company bylaws, a challenge to the incumbent directors requires notice six months before the annual meeting. This year's annual meeting took place April 28. Jana's dispute with Houston was of course too close to that date to result in a proxy contest this year, although Jana has already indicated it may wage one next year.

Prior to the April 28 meeting, Jana made it known that it thought shareholders should withhold their votes from all directors. "While the current Board faces no opposition this year and thus will undoubtedly be reelected, choosing to withhold your vote for all directors at this week's annual meeting will tell them that while their seats may be safe for this year, shareholders are watching them closely and demand results," said Jana's managing partner, Barry Rosenstein.

On May 3, Jana announced that the number of withholds was 30%, and that it considers this a victory. At last year's meeting, apparently, only between 4 and 7% of the votes were "withholds."

In a letter to the directors of Houston dated May 3, Mr. Rosenstein said that the 30% figure was artificially low, because on the record date Jana held most of its own interest in the company in the form of options, later redeemed. It then held only slightly more than 1% of the actual stock, and it now holds 9%, "meaning that the vote would have been closer to 40% had we been able to vote the shares we hold outright today."

Mr. Rosenstein asked the company to consider accommodating the views the shareholders have expressed in this way.

He wrote: "We therefore strongly suggest that you follow the example of other companies who have faced a substantial withhold vote and have responded by taking actions in accordance with their shareholders' wishes. A prominent example was the response to the approximately 40% withhold votes cast at Walt Disney's annual meeting in 2005, which led Michael Eisner to step down as Chairman of the Board."

Thus far, the company seems unmoved by this appeal. It held its first quarter 2006 earnings conference call Thursday [May 4], and announced no change in its plans for a $200 million stock purchase plan, or for the use of other cash to make asset acquisitions. It announced its estimated 2006 capital spending program of $521 million, which includes $443 million onshore.

A spokesman for Houston said after the meeting that the company believes its "balanced approach to capital allocation, which includes the previously announced $200 million share repurchase program, will deliver enhanced shareholder value both in the near- and long-term."

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.

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